Exclusive: Finra Probes Merrill over Potential Cold Calling Violations–Sources
The Financial Industry Regulatory Authority is probing possible cold calling violations at Merrill Lynch Wealth Management’s advisor training program, according to two sources with knowledge of the matter.
Spokespeople for Merrill and Finra declined to comment citing policies of not confirming or denying the existence of an investigation.
Finra monitors firms’ prospecting through its Rule 3230, which is “substantially similar” to Federal Trade Commission telemarketing sales rules and prohibits brokers from calling any person on internal or national do-not-call lists. It also requires members to have written policies and procedures as well as training of personnel regarding telemarketing and using do-not-call lists.
A spokesperson for the FTC as a matter of policy declined to comment or confirm whether it was probing any potential violations.
Merrill Lynch’s advisor training program, which typically includes around 3,000 to 3,500 novice brokers, has become more important to the firm since it ended active recruiting of experienced brokers in 2017.
The management source said that while cold calling had largely fallen by the wayside at Merrill as it has across much of the industry in the past decade, the firm revived the practice in 2019 as part of its “activity-based acquisition” client growth strategy in the training program. The firm set targets for its salaried trainees to make dozens of “contacts” or connections to live people each week and log them in its customer relationship management system, according to the source.
The challenge of monitoring those calls was compounded during the pandemic as trainees could not rely on face-to-face interactions to build their businesses, the person said.
The fallout from the violations has continued to reverberate as cold calling remains paused in the training program. A senior Merrill executive said in January that the firm will be rolling out a new prospecting guide that will be more reliant on LinkedIn and Bank of America referrals and have “far less” reliance on cold calling.
Trainees have been able to place outbound calls in recent months to existing customers but must use a telephonic keypad that routes calls through a computer program so that they can be logged and tracked, according to a separate broker source at the firm.
It was not clear whether or when the Finra action would ultimately result in a settlement or when it began. But the pause and remediation efforts follow a typical pattern for firms that want to show they are proactive in taking remedial efforts to reduce sanctions, according to three former enforcement lawyers, including James D. Sallah, a former senior counsel in the Securities and Exchange Commission’s enforcement division in Miami now with Sallah Astarita & Cox in Boca Raton.
Sallah, who said he was not involved with or aware of any regulatory case related to Merrill, would expect the wirehouse to sign with Finra a letter of acceptance, waiver and consent and agree to “undertaking” a plan that spelled out how it was going to revamp systems and stop do-not-call violations.
Finra investigators would be looking for “systemic failure or lack of effective procedures” to comply with its rules, said a former Finra enforcement lawyer, who is now in private practice, and asked not to be named. “That’s the kind of thing that Finra would definitely be interested in as an enforcement action,” the lawyer said.
Merrill has broadly revamped FADP over the past year, including placing it under a new co-head structure led by a bank executive and former regional brokerage manager Eric Schimpf to further integrate bank and brokerage operations.
The former head of training, Jennifer MacPhee, who sent the memo about the pause on July 31, according to a “Business Insider” report, retired on September 1. Merrill officials denied any connection between her retirement and the training concerns.
In another sign of the ongoing internal review, Merrill in January fired two novice brokers in New York City and Austin, Texas, for “conduct inconsistent with the Firm’s standards related to the Firm’s Do Not Call list,” according to BrokerCheck records.
The firings came over a year after Merrill in November 2019 ousted three experienced brokers in Arizona and Texas over cold calling violations.
It is not clear whether Finra’s investigation was prompted by customer complaints or those U5 filings or was self-reported. A Freedom of Information Act request filed with the FTC did not return any specific complaints of telemarketing against Merrill Lynch brokers.
Under FTC rules, do-not-call list issues may be subject to fines of up to $43,280 per violation, and each call may be considered a separate violation, according to the agency’s website.
In other cold calling enforcement cases, Merrill Lynch in 2014 paid $400,000 in a settlement with The New Hampshire Bureau of Securities Regulation over charges that brokers violated internal and FTC do-not-call lists when contacting customers in the state.
Finra in August 2019 fined a small Boca Raton broker-dealer $20,000 for calling 49 prohibited numbers.
A North Carolina plaintiff last month filed a class action claim against billionaire Ken Fisher’s registered investment advisory firm claiming that it illegally used automated dialing systems to call thousands of prospects.